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Preferred Bank Reports First Quarter Results

LOS ANGELES, April 19, 2017 (GLOBE NEWSWIRE) -- Preferred Bank (NASDAQ:PFBC), an independent commercial bank, today reported results for the quarter ended March 31, 2017. Preferred Bank (“the Bank”) reported net income of $10.3 million or $0.71 per diluted share for the first quarter of 2017. This compares to net income of $7.8 million or $0.56 per diluted share for the first quarter of 2016 and compares to net income of $10.1 million or $0.71 per diluted share for the fourth quarter of 2016. Net income for this quarter was impacted by a number of items. First, the Bank recorded a $1.5 million legal reserve for the potential settlement of a lawsuit which, in the past two years, had been very costly to defend. Second, the quarter was also negatively impacted by employer-paid tax expense of $945,000 resulting from the termination and distribution of the Bank’s deferred compensation plan, the distribution of annual bonuses and the vesting of restricted stock awards. Third, the adoption of a new tax-related accounting standard resulted in a decrease of $768,000 from the normal tax expense given the Bank’s level of pre-tax income.

Highlights from the first quarter of 2017:

*Linked quarter loan growth $144 million or 5.7%
*Linked quarter deposit growth $188 million or 6.8%
*Return on average assets 1.29%
*Return on beginning equity 13.99%
*Efficiency ratio 43.2%
*Net interest margin 3.67%

Li Yu, Chairman and CEO commented, “We are delighted to report a very vibrant first quarter of 2017. For the quarter, deposit growth was $188 million, a record in our corporate history. Although large deposit growth such as this will negatively affect return on assets, capital ratios and the net interest margin, it is still the most important factor in building a banking franchise. We are excited with these quarterly results.

“Likewise, first quarter loan growth was one of the strongest in our corporate history. The increase was $144 million or 5.7% from year-end 2016. Most of the new loan production took place in March, however, and thus the related incremental interest income was only a fraction of the incremental provision requirement. This will of course have a positive effect on our overall profitability in the ensuing quarters.

“Net interest income improved from $28.1 million in the fourth quarter of 2016 to $28.4 million in the first quarter of 2017 despite there being two fewer days this quarter than last. The improvement was largely the result of the Federal Reserve interest rate increases that occurred last December and in March. Overhead expense continues to be under control with the efficiency ratio at 43.2%. We continue to improve our operating capability and infrastructure by adding staff in BSA, Compliance and digital banking along with opportunistic hiring of frontline personnel.

“For the first quarter of 2017, Preferred Bank’s net income was $10.3 million or $0.71 per diluted share. Our quarterly income was further enhanced by a tax adjustment of $768,000, or $0.05 per diluted share. However during the quarter, we also recorded a reserve of $1.5 million for the potential settlement of a lawsuit which also had a net earnings effect of $0.05 per diluted share. This legal reserve will reduce legal costs for the remainder of 2017 and into 2018.

“We have many reasons to feel optimistic for the remainder of 2017. The following are some of them:

  • Our customers seem to be mostly bullish on the nation’s business environment. Although issues such as tax reform and a potential border tax remain unclear, investment and business activity seems to have accelerated.
  • Market consensus still points to another 2-3 FOMC rate hikes. Preferred Bank, being one of the most asset sensitive banks in the nation, will benefit greatly.
  • Although the new administration is putting regulatory reform high on its priorities, we can neither forecast the timing nor whether its effect will be meaningful to our type of community bank. However, a deceleration in the growth of compliance costs could be a possibility.
  • A corporate tax cut does not look like an illusion, although the timing and complexibility is hard to predict and seems to get pushed back further. If and when it happens, Preferred Bank as a full rate payer, will certainly benefit.
  • Finally, our loan pipeline appears to be consistent and vibrant. Second quarter loan production should be respectable. On March 1, 2017, we rolled out our home mortgage product which should be a source of new loans.”

Net Interest Income and Net Interest Margin. Net interest income before provision for loan and lease losses was $28.4 million for the first quarter of 2017. This compares favorably to the $23.9 million recorded in the first quarter of 2016 and to the $28.1 million recorded in the fourth quarter of 2016. The increase over both comparable periods is due primarily to loan growth as well as increases in the fed funds and Prime rates. The Bank’s taxable equivalent net interest margin was 3.67% for the first quarter of 2017, a 12 basis point decrease from the 3.79% achieved in the first quarter of 2016 and flat compared to the 3.67% recorded in the fourth quarter of 2016. Based on internal interest rate risk modeling, the Bank’s net interest margin should, in theory have expanded after the fed rate increases of December and March. However due to the special FHLB dividend paid in the fourth quarter of 2016, and due to a small decrease in loan fees quarter-over-quarter, the margin remained flat. For the month of March however, the Bank did see an expansion in the margin compared to January and February.

Noninterest Income. For the first quarter of 2017, noninterest income was $2,090,000 compared with $1,163,000 for the same quarter last year and compared to $1,286,000 for the fourth quarter of 2016. Service charges on deposits increased by $59,000 this quarter when compared to the same quarter last year and by $95,000 when compared to the fourth quarter of 2016. Letter of Credit fee income was $795,000 for the first quarter of 2017, an increase of $378,000 compared to the same period last year and an increase of $196,000 compared to the fourth quarter of 2016 as LC activity has increased. Other income was $856,000, a significant increase over both comparable periods. This was primarily due to $345,000 in OREO income.

Noninterest Expense. Total noninterest expense was $13.2 million for the first quarter of 2017, an increase of $2.1 million over the same period last year and an increase of $2.0 million over the fourth quarter of 2016, and was mainly driven by the $1.5 million legal reserve recorded this quarter. Salaries and benefits expense totaled $7.5 million for the first quarter of 2017 compared to $7.0 million recorded for the same period last year and compared to the $6.7 million recorded in the fourth quarter of 2016. The increase over the same period last year was due primarily to staffing/merit increases and the increase over the prior quarter was mainly due to employer paid taxes on the deferred compensation plan distribution, the annual bonus payout and the vesting of restricted stock awards. Occupancy expense totaled $1.2 million for the first quarter of 2017 and was flat when compared to both the same quarter last year as well as the fourth quarter of 2016. Professional services expense was $1.4 million for the first quarter of 2017 compared to $962,000 for the same quarter of 2016 and $1.5 million recorded in the fourth quarter of 2016. The increase over the same period last year was due mainly to legal fees which increased by $465,000. The Bank incurred $109,000 in costs related to its one OREO property and this compares to OREO expense of $199,000 in the first quarter of 2016 and $187,000 in the fourth quarter of 2016. Other expenses were $2.6 million for the first quarter of 2017 and an increase of approximately $1.5 million over both comparable periods. This was due to the aforementioned legal settlement reserve. The Bank’s efficiency ratio came in at 43.2% for the quarter, driven higher by the legal reserve. Excluding that item, the efficiency ratio would have been 38.1%.

Income Taxes

The Bank recorded a provision for income taxes of $5.6 million for the first quarter of 2017. This represents an effective tax rate (“ETR”) of 35.2% for the quarter. This is down from the ETR of 40.6% for the first quarter of 2016 and down from the 38.0% ETR recorded in the fourth quarter of 2016. The decrease this quarter was due the adoption of Accounting Standards Update (ASU) 2016-09 which resulted in an excess tax benefit from share-based compensation and a $768,000 net tax benefit on the income statement. It is anticipated that the Bank’s ETR will revert back closer to its historical norm in the ensuing quarters.

Balance Sheet Summary

Total gross loans and leases at March 31, 2017 were $2.69 billion, an increase of $144.1 million or 5.7% over the total of $2.54 billion as of December 31, 2016. Total deposits as of March 31, 2017 were $2.95 billion, an increase of $187.8 million or 6.8% over the $2.76 billion at December 31, 2016. Total assets as of March 31, 2017 were $3.41 billion, an increase of $188.9 million or 5.9% over the $3.22 billion as of December 31, 2016.

Asset Quality
As of March 31, 2017 nonaccrual loans totaled $7.8 million, up slightly from the $7.6 million total as of December 31, 2016. Total net charge-offs for the first quarter of 2017 were $121,000 compared to a net recovery of $22,000 the fourth quarter of 2016 and compared to a net recovery of $223,000 for the first quarter of 2016. The Bank recorded a provision for loan losses of $1.5 million for the first quarter of 2017. This is an increase from the $800,000 provision recorded in the same quarter last year but a decrease from the $1.9 million provision recorded in the fourth quarter of 2016. The allowance for loan loss at March 31, 2017 was $27.9 million or 1.04% of total loans compared to $26.5 million or 1.04% of total loans at December 31, 2016.

OREO

As of March 31, 2017 and December 31, 2016, the Bank held one OREO property, a $4.1 million multi-family property located outside of California.

Capitalization
As of March 31, 2017, the Bank’s leverage ratio was 9.01%, the common equity tier 1 capital ratio was 9.16% and the total capital ratio was 13.22%. As of December 31, 2016, the Bank’s leverage ratio was 9.43%, the common equity tier 1 ratio was 9.83% and the total risk based capital ratio was 14.09%.

Conference Call and Webcast
A conference call with simultaneous webcast to discuss Preferred Bank’s first quarter 2017 financial results will be held tomorrow, April 20th at 2:00 p.m. Eastern / 11:00 a.m. Pacific. Interested participants and investors may access the conference call by dialing 844-826-3037 (domestic) or 412-317-5182 (international) and referencing “Preferred Bank.” There will also be a live webcast of the call available at the Investor Relations section of Preferred Bank's website at www.preferredbank.com. Web participants are encouraged to go to the website at least 15 minutes prior to the start of the call to register, download and install any necessary audio software.

Preferred Bank's Chairman and CEO Li Yu, President and COO Wellington Chen, Chief Financial Officer Edward J. Czajka, and Chief Credit Officer Nick Pi will be present to discuss Preferred Bank's financial results, business highlights and outlook. After the live webcast, a replay will remain available in the Investor Relations section of Preferred Bank's website. A replay of the call will also be available at 877-344-7529 (domestic) or 412-317-0088 (international) through May 4, 2017; the passcode is 10105309.

About Preferred Bank

Preferred Bank is one of the larger independent commercial banks in California. The bank is chartered by the State of California, and its deposits are insured by the Federal Deposit Insurance Corporation, or FDIC, to the maximum extent permitted by law. The Company conducts its banking business from its main office in Los Angeles, California, and through ten full-service branch banking offices in the California cities of Alhambra, Century City, City of Industry, Torrance, Arcadia, Irvine, Diamond Bar, Pico Rivera, Tarzana and San Francisco, and one office in Flushing, New York. Preferred Bank offers a broad range of deposit and loan products and services to both commercial and consumer customers. The bank provides personalized deposit services as well as real estate finance, commercial loans and trade finance to small and mid-sized businesses, entrepreneurs, real estate developers, professionals and high net worth individuals. Although originally founded as a Chinese-American Bank, Preferred Bank now derives most of its customers from the diversified mainstream market but does continue to benefit from the significant migration to California of ethnic Chinese from China and other areas of East Asia.

Forward-Looking Statements
This press release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements include, but are not limited to, statements about the Bank’s future financial and operating results, the Bank's plans, objectives, expectations and intentions and other statements that are not historical facts. Such statements are based upon the current beliefs and expectations of the Bank’s management and are subject to significant risks and uncertainties. Actual results may differ from those set forth in the forward-looking statements. The following factors, among others, could cause actual results to differ from those set forth in the forward-looking statements: changes in economic conditions; changes in the California real estate market; the loss of senior management and other employees; natural disasters or recurring energy
shortage; changes in interest rates; competition from other financial services companies; ineffective underwriting practices; inadequate allowance for loan and lease losses to cover actual losses; risks inherent in construction lending; adverse economic conditions in Asia; downturn in international trade; inability to attract deposits; inability to raise additional capital when needed or on favorable terms; inability to manage growth; inadequate communications, information, operating and financial control systems, technology from fourth party service providers; the U.S. government’s monetary policies; government regulation; environmental liability with respect to properties to which the bank takes title; and the threat of terrorism. Additional factors that could cause the Bank's results to differ materially from those described in the forward-looking statements can be found in the Bank’s 2016 Annual Report on Form 10-K filed with the Federal Deposit Insurance Corporation which can be found on Preferred Bank’s website. The forward-looking statements in this press release speak only as of the date of the press release, and the Bank assumes no obligation to update the forward-looking statements or to update the reasons why actual results could differ from those contained in the forward-looking statements. For additional information about Preferred Bank, please visit the Bank’s website at www.preferredbank.com.

Financial Tables to Follow

PREFERRED BANK
Condensed Consolidated Statements of Operations
(unaudited)
(in thousands, except for net income per share and shares)
For the Quarter Ended
March 31, December 31, March 31,
2017 2016 2016
Interest income:
Loans, including fees $31,919 $31,248 $25,460
Investment securities 2,482 2,570 1,784
Fed funds sold 231 162 77
Total interest income 34,632 33,980 27,321
Interest expense:
Interest-bearing demand $1,465 1,320 1,050
Savings 21 21 18
Time certificates 3,108 2,982 2,315
FHLB borrowings 65 67 59
Subordinated debit 1,531 1,526 -
Total interest expense 6,190 5,916 3,442
Net interest income 28,442 28,064 23,879
Provision for loan losses 1,500 1,900 800
Net interest income after provision for
loan losses 26,942 26,164 23,079
Noninterest income:
Fees & service charges on deposit accounts 353 258 294
LC fee income 795 599 417
BOLI income 86 87 85
Net gain on sale of investment securities - 133 36
Other income 856 209 331
Total noninterest income 2,090 1,286 1,163
Noninterest expense:
Salary and employee benefits 7,509 6,660 7,021
Net occupancy expense 1,182 1,199 1,203
Business development and promotion expense 240 242 222
Professional services 1,162 1,492 962
Office supplies and equipment expense 353 350 351
Other real estate owned related expense and valuation allowance on LHFS 108 187 199
Other 2,624 1,093 1,080
Total noninterest expense 13,178 11,223 11,038
Income before provision for income taxes 15,854 16,227 13,204
Income tax expense 5,573 6,166 5,361
Net income $10,281 $10,061 $7,843
Dividend and earnings allocated to participating securities (110) (131) (119)
Net income available to common shareholders $10,171 $9,930 $7,724
Income per share available to common shareholders
Basic $0.71 $0.71 $0.56
Diluted $0.71 $0.71 $0.56
Weighted-average common shares outstanding
Basic 14,314,624 13,984,346 13,796,892
Diluted 14,386,402 14,066,596 13,911,195
Dividends per share $0.18 $0.18 $0.15

PREFERRED BANK
Condensed Consolidated Statements of Financial Condition
(unaudited)
(in thousands)
March 31, December 31,
2017 2016
(Unaudited) (Audited)
Assets
Cash and due from banks$329,855 $306,330
Fed funds sold 120,500 97,500
Cash and cash equivalents 450,355 403,830
Securities held to maturity, at amortized cost 9,912 10,337
Securities available-for-sale, at fair value 197,455 199,833
Loans and leases 2,687,603 2,543,549
Less allowance for loan and lease losses (27,857) (26,478)
Less net deferred loan fees (2,572) (1,682)
Net loans and leases 2,657,174 2,515,389
Other real estate owned 4,112 4,112
Customers' liability on acceptances 4,595 772
Bank furniture and fixtures, net 5,250 5,313
Bank-owned life insurance 8,883 8,825
Accrued interest receivable 9,651 9,550
Investment in affordable housing 22,904 23,670
Federal Home Loan Bank stock 6,965 9,331
Deferred tax assets 26,286 26,605
Other asset 9,387 4,031
Total assets$3,412,929 $3,221,598
Liabilities and Shareholders' Equity
Liabilities:
Deposits:
Demand$576,060 $586,272
Interest-bearing demand 1,137,145 1,019,058
Savings 34,434 34,067
Time certificates of $250,000 or more 495,177 427,172
Other time certificates 707,830 697,155
Total deposits $2,950,646 $2,763,724
Acceptances outstanding 4,595 772
Advances from Federal Home Loan Bank 26,487 26,516
Subordinated debt issuance 98,870 98,839
Commitments to fund investment in affordable housing partnership 10,354 10,632
Accrued interest payable 4,647 3,199
Other liabilities 22,947 19,851
Total liabilities 3,118,546 2,923,533
Commitments and contingencies
Shareholders' equity:
Preferred stock. Authorized 25,000,000 shares; issued and no outstanding shares at March 31, 2017 and December 31, 2016
Common stock, no par value. Authorized 20,000,000 shares; issued and outstanding 14,505,113 at March 31, 2017 and 14,232,907 at December 31, 2016, respectively. 173,332 169,861
Treasury stock (33,233) (19,115)
Additional paid-in-capital 38,785 39,929
Accumulated income 115,931 108,261
Accumulated other comprehensive income:
Unrealized loss on securities, available-for-sale, net of tax of $313 and $632 at March 31, 2017 and December 31, 2016 (432) (871)
Total shareholders' equity 294,383 298,065
Total liabilities and shareholders' equity $3,412,929 $3,221,598


PREFERRED BANK
Selected Consolidated Financial Information
(unaudited)
(in thousands, except for ratios)
For the Quarter Ended
March 31, December 31,September 30, June 30, March 31,
2017 2016 2016 2016 2016
Unaudited historical quarterly operations data:
Interest income$ 34,632 $ 33,980 $ 31,889 $ 29,723 $ 27,321
Interest expense 6,190 5,916 5,394 3,982 3,442
Interest income before provision for credit losses 28,442 28,064 26,495 25,741 23,879
Provision for credit losses 1,500 1,900 1,400 2,300 800
Noninterest income 2,090 1,286 1,350 1,660 1,163
Noninterest expense 13,178 11,223 10,486 10,791 11,038
Income tax expense 5,573 6,166 6,080 5,724 5,361
Net income 10,281 10,061 9,879 8,586 7,843
Earnings per share
Basic$ 0.71 $ 0.71 $ 0.70 $ 0.61 $ 0.56
Diluted$ 0.71 $ 0.71 $ 0.69 $ 0.61 $ 0.56
Ratios for the period:
Return on average assets 1.29% 1.28% 1.31% 1.26% 1.21%
Return on beginning equity 13.99% 13.74% 13.92% 12.49% 11.94%
Net interest margin (Fully-taxable equivalent) 3.67% 3.67% 3.59% 3.87% 3.79%
Noninterest expense to average assets 1.66% 1.43% 1.39% 1.58% 1.70%
Efficiency ratio 43.16% 38.24% 37.66% 39.38% 44.08%
Net charge-offs (recoveries) to average loans (annualized) 0.02% 0.00% 0.14% 0.36% -0.04%
Ratios as of period end:
Tier 1 leverage capital ratio 9.01% 9.43% 9.47% 10.05% 10.29%
Common equity tier 1 risk-based capital ratio 9.16% 9.83% 9.96% 10.41% 10.74%
Tier 1 risk-based capital ratio 9.16% 9.83% 9.96% 10.41% 10.74%
Total risk-based capital ratio 13.22% 14.09% 14.36% 13.65% 11.70%
Allowances for credit losses to loans and leases at end of period 1.04% 1.04% 1.01% 1.06% 1.10%
Allowance for credit losses to non-performing
loans and leases 357.09% 346.22% 1460.49% 722.47% 2346.18%
Average balances:
Total loans and leases $ 2,563,473 $ 2,465,492 $ 2,344,102 $ 2,248,652 $ 2,067,047
Earning assets$ 3,167,031 $ 3,066,189 $ 2,953,325 $ 2,687,435 $ 2,550,821
Total assets$ 3,228,152 $ 3,124,984 $ 3,009,457 $ 2,746,031 $ 2,605,917
Total deposits$ 2,775,840 $ 2,666,878 $ 2,590,702 $ 2,400,756 $ 2,291,764


PREFERRED BANK
Selected Consolidated Financial Information
(unaudited)
(in thousands, except for ratios)
As of
March 31, December 31, September 30, June 30, March 31,
2017 2016 2016 2016 2016
Unaudited quarterly statement of financial position data:
Assets:
Cash and cash equivalents$450,355 $403,830 $405,522 $376,485 $293,547
Securities held-to-maturity, at amortized cost 9,912 10,337 4,812 5,143 5,550
Securities available-for-sale, at fair value 197,455 199,833 203,272 201,256 162,654
Loans and Leases:
Real estate - Single and multi-family residential $479,279 $490,683 $493,489 $393,076 $401,708
Real estate - Land for housing 14,754 14,774 14,796 14,817 14,838
Real estate - Land for income properties 1,792 1,801 1,809 6,316 1,816
Real estate - Commercial 1,160,077 1,047,321 1,037,687 995,213 924,913
Real estate - For sale housing construction 109,703 104,960 104,973 95,519 82,153
Real estate - Other construction 150,322 128,434 96,147 72,963 66,636
Commercial and industrial 741,339 733,709 659,306 659,701 626,599
Trade finance and other 30,337 21,867 24,460 34,625 39,323
Gross loans 2,687,603 2,543,549 2,432,667 2,272,230 2,157,986
Allowance for loan and lease losses (27,857) (26,478) (24,556) (23,983) (23,681)
Net deferred loan fees (2,572) (1,682) (1,913) (3,682) (3,065)
Total loans, net $2,657,174 $2,515,389 $2,406,198 $2,244,565 $2,131,240
Other real estate owned $4,112 $4,112 $4,112 $4,112 $4,112
Investment in affordable housing 22,904 23,670 24,278 24,886 25,499
Federal Home Loan Bank stock 6,965 9,331 9,331 9,332 6,965
Other assets 64,052 55,096 52,899 49,862 53,783
Total assets $3,412,929 $3,221,598 $3,110,424 $2,915,641 $2,683,350
Liabilities:
Deposits:
Demand $576,060 $586,272 $575,388 $540,374 $528,126
Interest-bearing demand 1,137,145 1,019,058 945,358 855,661 803,374
Savings 34,434 34,067 31,344 29,031 30,002
Time certificates of $250,000 or more 495,177 427,172 416,807 398,736 339,971
Other time certificates 707,830 697,155 691,099 692,063 656,386
Total deposits $2,950,646 $2,763,724 $2,659,996 $2,515,865 $2,357,859
Advances from Federal Home Loan Bank $26,487 $26,516 $26,544 $26,573 $26,601
Subordinated debt issuance 98,870 98,839 98,851 61,475 -
Commitments to fund investment in affordable housing partnership 10,354 10,632 11,015 11,454 11,454
Other liabilities 32,189 23,822 22,760 17,922 13,862
Total liabilities $3,118,546 $2,923,533 $2,819,166 $2,633,289 $2,409,776
Equity:
Net common stock, no par value$178,884 $190,675 $188,430 $187,212 $185,780
Retained earnings 115,931 108,261 100,804 93,119 86,716
Accumulated other comprehensive income (432) (871) 2,024 2,021 1,079
Total shareholders' equity $294,383 $298,065 $291,258 $282,352 $273,574
Total liabilities and shareholders' equity $3,412,929 $3,221,598 $3,110,424 $2,915,641 $2,683,350

Preferred Bank
Loan and Credit Quality Information
Allowance For Credit Losses & Loss History
Quarter Ended Year Ended
March 31, 2017 December 31, 2016
(Dollars in 000's)
Allowance For Credit Losses
Balance at Beginning of Period $26,478 $22,658
Charge-Offs
Commercial & Industrial 161 4,323
Mini-perm Real Estate - -
Construction - Residential - -
Construction - Commercial - -
Land - Residential - -
Land - Commercial - -
Others - -
Total Charge-Offs 161 4,323
Recoveries
Commercial & Industrial 2 985
Mini-perm Real Estate - -
Construction - Residential - -
Construction - Commercial 17 26
Land - Residential - -
Land - Commercial 22 732
Total Recoveries 40 1,743
Net Loan Charge-Offs 121 2,580
Provision for Credit Losses 1,500 6,400
Balance at End of Period $27,857 $26,478
Average Loans and Leases $2,563,473 $2,282,074
Loans and Leases at end of Period $2,687,603 $2,687,603
Net Charge-Offs to Average Loans and Leases 0.02% 0.11%
Allowances for credit losses to loans and leases at end of period 1.04% 1.04%


AT THE COMPANY: Edward J. Czajka Executive Vice President Chief Financial Officer (213) 891-1188 AT FINANCIAL PROFILES: Kristen Papke General Information (310) 663-8007 kpapke@finprofiles.com

Source:Preferred Bank